Investors looking at stocks with huge yields need to hit the pause button because sometimes the dividend yields aren't what they seem. That's the case today with Hawaiian Electric Industries(NYSE: HE), which some online quote services list as offering a 14%-plus dividend yield.
Here's what's going on with Hawaiian Electric and why that yield is already as good as gone.
Financial data is a complicated thing
There's a big disparity today when it comes to the reporting of Hawaiian Electric's dividend yield. Some quote services show it as 14.9%, while others simply show a dash mark indicating that there is no dividend. Both options are -- at least for the moment -- correct. But how can that be?
Image source: Getty Images.
There are millions, if not billions (or even trillions) of financial data points created every single day. Keeping track of the data for any single stock is actually harder than it might seem. Often the goal is simply to pull out unusual exceptions for examination. Anything that looks about right, well, that simply passes on through. So it shouldn't be at all shocking for investors to see data that is wrong when they look at financial websites.
And while a 14%-plus dividend yield is a huge figure, it really isn't wildly outlandish. Wall Street can react in dramatic fashion to bad news, often punishing a stock far more severely than is warranted. Indeed, energy giant ExxonMobil's dividend spiked well above 10% during the early days of the coronavirus pandemic as oil prices tumbled despite decades of annual dividend increases and a rock-solid balance sheet.
XOM Dividend Yield data by YCharts
In other words, there probably isn't a good enough reason to expect Hawaiian Electric's yield to set off alarm bells.
Hawaiian Electric has very real problems
So what is actually going on? The answer comes down to Hawaiian Electric's utility operations in Hawaii. There was a major fire in the state earlier in 2023 and there have been questions surrounding the company's potential liability. It is already dealing with legal issues. This is where things get interesting.
The company had already announced its second-quarter dividend of $0.36 per share payable on Sept. 8. That means the Q2 dividend was paid as expected. It entered the dividend data feed. Yield is a simple calculation that is normally determined by multiplying the current dividend by 4 and dividing by the stock price. As long as that dividend is in the data feed, the yield is technically 14% or so.
However, on Aug. 21, Hawaiian Electric provided an update via an SEC filing. In the filing, it stated that it was eliminating the dividend so it could conserve cash. The company explained that "[t]aking this action will allow us to continue to allocate cash to rebuilding and restoring power and ensure a strong future for the utility." However, Hawaiian Electric is also likely worried that lawsuits related to the fire will be a huge cash drain. More active data feeds would have taken this news as an indication to override the normal dividend and force it to be zero (or just a dash). Essentially, going forward, that is exactly what the yield will be once the third-quarter dividend data enters the data feed at zero.
So for investors thinking they have found a high-yield opportunity, well, that's not the case. Yes, the yield based on historical dividend data is 14%, but it is on its way to zero because the dividend has already been eliminated going forward.
There's one more issue for Hawaiian Electric shareholders
In more ways than one, Hawaiian Electric has done what it had to do. Cutting the dividend was necessary because of the events that transpired. Filing an update via an SEC form was what it had to do legally to inform investors of what was going on. It can honestly say that investors should know not to trust the quote services reporting 14% dividend yields.
But most investors don't track SEC filings and there was no news release from Hawaiian Electric telling investors about the dividend cut, which seems like an important oversight. The company did provide a news "update" on the fire issue at about the same time as the SEC filing, but the word "dividend" didn't appear even a single time. At the end of the day, this yield trap has already been sprung, but unless you were looking very closely, you may have missed it.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
